Is GameStop Really Back?

Shares of GameStop (NYSE: GME) opened nicely higher this morning, after the video game retailer washed away a disappointing holiday quarter with a cheery outlook.

There are a few reasons for GameStop bulls to be cautious in running their victory laps, but let's dive into the numbers first.

Total sales inched 1% higher, to $3.52 billion as a result of heady expansion. Comps actually took a 7.9% hit, matching the negative unit-level performance that the chain posted for the entire fiscal year. Earnings for the seasonally potent quarter fell to $1.29 a share, from an adjusted $1.34 a share showing a year ago.

The good news is that 2010 should be a winner, according to the company. Comps will be marginally positive, with strength in software offsetting a decline on the hardware side. Total sales will soar 4% to 6%, aided by the opening of 400 new stores. Finally, earnings per share will clock in at a record $2.58 to $2.68 – a 14% to 18% gain.

If it plays out this way, today's euphoria will be more than justified. I'm just skeptical because I've been following GameStop closely since Barnes & Noble (NYSE: BKS) spun it off about six years ago.

This is the same company that called bottom in May, August, and November and was wrong every single time.

Allow me to be a little more blunt. Let's compare GameStop's upbeat guidance a year ago with its eventual performance.

Metric

3/26/09 Guidance

Reality

Sales Growth

10%-12%

3.1%

Comps

4%-6%

(7.9%)

EPS Growth

18%-22%

(5.3%)

How confident are you in GameStop's flawed visibility now?

To be fair, I should also be cynical about my own cynicism. The past year has been brutal for the industry itself. GameStop's model has also been challenged. Amazon.com (Nasdaq: AMZN) , Toys "R" Us, and Best Buy (NYSE: BBY) went on to test buyback models, threatening GameStop's high-margin used game resale business. Wal-Mart (NYSE: WMT) and Amazon also were aggressive discounters on the video game front this holiday season. In other words, it's hard to imagine things deteriorating this year the way they did last year. The company is also cranking out its outlook from what is hopefully a more humbled perspective.

GameStop's healthy hoard of cash gives it some flexibility to meet its metrics. It can expand quickly to grow the top line. It can also eat its own stock to pad the bottom line. The retailer announced a $300 million share buyback two months ago -- and meant it. It has now repurchased $247 million worth of stock.

This doesn't mean that I am ditching my bear suit. I still think that console-powered digital marketplaces, social gaming, and smartphone apps will make GameStop less relevant with every passing year. I'll concede that there's a tempting valuation argument to be made in favor of GameStop at current prices, but this morning's pop has the stock back to where it was three months ago -- when naïve analysts figured that GameStop would be earning $2.92 a share this new fiscal year.

If someone has a case for GameStop mattering more a year or two from now, I'm all ears in the comment box below. If not, be careful as you tiptoe through this morning's euphoria.

Longtime Fool contributor Rick Munarriz will admit to still playing video games, though finding time is the rub. He does not own shares in any of the companies in this story. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Fool has a disclosure policy.

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I know it's scary for people to see gamestop growing at 400+ stores per year and earning stay the same or slightly decline. There is no doubt gamestop is leveraging up and that they are dieing to see earnings growth so much so that they fail to see the forest sometimes. But i have a lot of money bet that when all those stores that are just breaking even (nearly all of them) start making money again what gamestop has built of the last couple years will turn into crazy profit.

I know it's scary for people to see gamestop growing at 400+ stores per year and earning stay the same or slightly decline. There is no doubt gamestop is leveraging up and that they are dieing to see earnings growth so much so that they fail to see the forest sometimes. But i have a lot of money bet that when all those stores that are just breaking even (nearly all of them) start making money again what gamestop has built of the last couple years will turn into crazy profit.

New stores have full ROI in about 3 years. That is 24% return per year on each new store opened. this is the reason why the company is allocating capital to new stores.

Gaming is much like the movie business and will be cyclical as titles wax and wane. Also a headwind is console prices falling. This macro element will cause revenue and profit shifts. You will get a larger base of users who will buy more software titles but less revenue due to console price falling. Software is higher margin so overall selling more razors now to sell even more blades later to gamers is better for sony, msft, nintendo plus GME too.

Social gaming and smartphone/iPad gaming will garner some attention away from consoles but the whole pie is growing and that tide will lift all boats. GME has the biggest boat and we are seeing recovery already. I predict 2010 and/or 2011 will be GME's biggest year(s) in their history and comps also going positive

New stores have full ROI in about 3 years. That is 24% return per year on each new store opened. this is the reason why the company is allocating capital to new stores.

Gaming is much like the movie business and will be cyclical as titles wax and wane. Also a headwind is console prices falling. This macro element will cause revenue and profit shifts. You will get a larger base of users who will buy more software titles but less revenue due to console price falling. Software is higher margin so overall selling more razors now to sell even more blades later to gamers is better for sony, msft, nintendo plus GME too.

Social gaming and smartphone/iPad gaming will garner some attention away from consoles but the whole pie is growing and that tide will lift all boats. GME has the biggest boat and we are seeing recovery already. I predict 2010 and/or 2011 will be GME's biggest year(s) in their history and comps also going positive